IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Should Courts Always Enforce What Contracting Parties Write?

We find an economic rationale for the common sense answer to the question in our title --- courts should not always enforce what the contracting parties write. We describe and analyze a contractual environment that allows a role for an active court. An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties' welfare under a veil of ignorance. We study a buyer-seller model with asymmetric information and ex-ante investments, in which some contingencies cannot be contracted on. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex-ante and interim-efficient contracts. In particular, some types pool in equilibrium. By voiding some contracts that the pooling types would like the court to enforce, the court is able to induce them to separate, and hence to improve ex-ante welfare.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www8.georgetown.edu/departments/economics/pdf/329.pdf
File Function: Full text
Download Restriction: None

Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~03-03-29.

as
in new window

Length:
Date of creation:
Date of revision:
Handle: RePEc:geo:guwopa:gueconwpa~03-03-29
Contact details of provider: Postal: Georgetown University Department of Economics Washington, DC 20057-1036
Phone: 202-687-6074
Fax: 202-687-6102
Web page: http://econ.georgetown.edu/
Email:

Order Information: Postal: Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036
Web: http://econ.georgetown.edu/ Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Anderlini, Luca & Felli, Leonardo & Postlewaite, Andrew, 2001. "Courts of Law and Unforeseen Contingencies," CEPR Discussion Papers 2835, C.E.P.R. Discussion Papers.
  2. Lucian Arye Bebchuk & Steven Shavell, 1991. "Information and the Scope of Liability for Breach of Contract: The Rule of Hadley V. Baxendale," NBER Working Papers 3696, National Bureau of Economic Research, Inc.
  3. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2009. "Should Courts Always Enforce What Contracting Parties Write?," PIER Working Paper Archive 09-004, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Kathryn E. Spier, 1992. "Incomplete Contracts and Signalling," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 432-443, Autumn.
  5. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July.
  6. Luca Anderlini & Leonardo Felli & Alessandro Riboni, 2008. "Statute Law or Case Law?," Carlo Alberto Notebooks 83, Collegio Carlo Alberto.
  7. Baliga, S. & Corchon, L.C. & Sjostrom, T., 1995. "The Theory of Implemetation when the Planner is a PLayer," Cambridge Working Papers in Economics 9512, Faculty of Economics, University of Cambridge.
  8. Steven Shavell, 2003. "On the Writing and the Interpretation of Contracts," NBER Working Papers 10094, National Bureau of Economic Research, Inc.
  9. Luca Anderlini & Leonardo Felli & Alessandro Riboni, 2008. "Statute Law or Case Law?," STICERD - Theoretical Economics Paper Series /2008/528, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  10. Levy, Gilat, 2003. "Careerist Judges," CEPR Discussion Papers 3948, C.E.P.R. Discussion Papers.
  11. Aghion, Philippe & Hermalin, Benjamin, 1990. "Why Legal Restrictions on Private Contracts Can Enhance Efficiency," Department of Economics, Working Paper Series qt4j76f10g, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  12. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September.
  13. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
  14. Eric Maskin, 2006. "On the Rationale for Penalty Default Rules," Economics Working Papers 0058, Institute for Advanced Study, School of Social Science.
  15. Aghion, P. & Hermalin, B., 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," DELTA Working Papers 90-14, DELTA (Ecole normale supérieure).
  16. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  17. Steven Shavell, 2006. "On the Writing and the Interpretation of Contracts," Journal of Law, Economics and Organization, Oxford University Press, vol. 22(2), pages 289-314, October.
  18. Adler, Barry E., 1999. "The Questionable Ascent of Hadley v. Baxendale," Berkeley Olin Program in Law & Economics, Working Paper Series qt3wh5v8j9, Berkeley Olin Program in Law & Economics.
  19. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
  20. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2006. "Active courts and menu contracts," LSE Research Online Documents on Economics 3569, London School of Economics and Political Science, LSE Library.
  21. Alan Schwartz & Robert Scott, . "Contract Theory and the Limits of Contract Law," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1011, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
  22. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2006. "Active Courts and Menu Contracts," STICERD - Theoretical Economics Paper Series /2006/511, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  23. Elisabetta Iossa & Giuliana Palumbo, 2002. "Decision Rules and Information Provision:Monitoring versus Manipulation," Economics and Finance Discussion Papers 02-17, Economics and Finance Section, School of Social Sciences, Brunel University.
  24. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
  25. B. Douglas Bernheim & Michael D. Whinston, 1997. "Incomplete Contracts and Strategic Ambiguity," Harvard Institute of Economic Research Working Papers 1787, Harvard - Institute of Economic Research.
  26. Murat Usman, 2002. "Verifiability and Contract Enforcement: A Model with Judicial Moral Hazard," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 67-94, April.
  27. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:geo:guwopa:gueconwpa~03-03-29. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marcia Suss)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.